Public Bill Committee

[Mr. Eric Illsley in the Chair]

Clause 9

Specific conditions: temporary public ownership

Question proposed [this day], That the clause stand part of the Bill.

Question again proposed.

Peter Bone: That was the longest intervention that I have ever had to deal withit has lasted several hoursbut the hon. Member for South Derbyshire (Mr. Todd) made a good point earlier. I wrote down what he said. It is the reverse of the point that I was making, but it is none the less a point of principle.
The hon. Gentleman said that there was a market solution for HBOS and Lloyds. The competition laws were originally torn up so that there would be a market solution, but since then we have had nationalisation. That is at the heart of the issue.
The Government say that nationalisation is the last resort. However, we have seen with HBOS and Lloyds that it is not the last resort but the favoured resort. We must return to that question on Report, as the Governments assurances and statements do not match the Bills provisions; nor do they match what is happening in practice.

Ian Pearson: I shall make a couple of points in response to the hon. Gentlemans concern about whether temporary public ownership is a measure of last resort. As I indicated earlier, it is not appropriate to use the term last resort in the Bill. However, I believe that the Bill makes it clear that temporary public ownership is a tool of last resort. I shall explain why.
The Bill achieves that purpose by ensuring a higher public interest test for temporary public ownership than for the stabilisation options of transfer to a private sector purchaser or a bridge bank. The hon. Member for Fareham will appreciate that under clause 9 a bank can be taken into temporary public ownership only if there is a serious threat to financial stability or if it is necessary to protect the public interest when financial assistance has been provided to the failing bank to reduce or resolve that threat to financial stability.
Under clause 8, however, a bridge bank or private sector purchase can be exercised if it is necessary to protect financial stability, to protect confidence in the banking systems or to protect depositorsor any combination of the three. Under clause 8, the Bank of England can exercise a private sector purchaser or bridge bank tool if it believes that it is necessary to protect the failing banks depositors, even if it believes that there is no risk to financial stability. That is not allowed for temporary public ownership.

Mark Hoban: In effect, clause 9 covers a much narrower set of circumstances, with stricter tests. Clause 8 deals with a much wider range of conditions that could be used to justify bridge bank or private sector solutions, whereas clause 9 deals with a narrow and serious threat to financial stability, or financial assistance, and it is that which could trigger temporary public ownership.

Ian Pearson: Bingo! That is exactly the position I was trying to explain. Clause 8 would allow the regime to be exercised on the grounds of needing to protect depositors. We cannot do that under clause 9. We believe that the narrowing demonstrates that temporary public ownership is a last resort. It is clearly not appropriate to put it in the Bill, but that is certainly what is intended.

Question put and agreed to.

Clause 9 ordered to stand part of the Bill.

Clause 10

Private Sector Purchaser

Question proposed, That the clause stand part of the Bill.

Peter Viggers: I am not sure whether there is a mistake in the clause, but I should like clarification. The heading of the clause is Private Sector Purchaser, yet subsection (1) refers to a commercial purchaser. I would like to know the difference. A private sector purchaser is clearly one who is not in the public sector. That is the only definition. The word commercial must refer to a body involved in commerce, which could include a state. State enterprises could thus be involved if there was a commercial solution and that, of course, would include sovereign funds. Is there meant to be a distinction between private sector and commercial? My understanding of law is that the text in a Bill takes precedence over the clause heading, so are we talking about a commercial solution that could involve sovereign funds and enterprises owned by other states?

Ian Pearson: Clause 10 establishes that where the general special resolution regime conditionsas set out in clause 7and the specific conditions for the private sector purchaser stabilisation option of clause 8 are met, the Bank of England may effect a sale of all or part of the business of a bank to a commercial purchaser. The Bank is already responsible for important aspects of financial stability and the Bill provides for the responsibilities to be formalised, including through the addition of a statutory financial stability objective, as previously discussed in our debate on clause 216.
Given those responsibilities, the Bank should have the tools available to resolve a bank in the interests of financial stability, so the Government are making the Bank of England the UKs lead resolution authority, conferring on it powers to effect the key stabilisation optionsthe private purchaser tool we are talking about and the bridge bank tool. Stakeholders and the Treasury Committee have supported the proposal.
The means to transfer the ownership and business of deposit takers already exists but commercial transfer mechanisms are not appropriate for dealing with failing banks. They are often too slow and do not provide sufficient certainty for parties involved in the transaction. The same is true of the part 7 procedure in the Financial Services and Markets Act 2000. The private sector purchaser tool in the clause provides for swift and certain transfer of some or all of the banking business from a failing bank to a private sector purchaser. The resolution of a failing bank by way of a transfer to a private sector purchaser is a highly desirable outcome and would generally be the Governments favoured option, as I hope I have made clear.
A private sector solution is likely in many circumstances to be the resolution option that best meets the special resolution objectives. The transfer may be effected either through the transfer of a banks shares or other securities, or its property, rights and liabilities. Having both options provides enhanced flexibility. Property transfer powers also enable the Bank of England to choose which parts of a failing banks business to transfer. The facility for partial property transfers provides further flexibility to the Bank of England, increasing the chance of a private sector salean important point.
The hon. Member for Gosport is correct to note that the clause text has primacy. The heading is intended to give an indication of the intention. The phrasing in the clause is drawn widely to ensure that a range of transfers is possible, subject to meeting the public interest.

Question put and agreed to.

Clause 10 ordered to stand part of the Bill.

Clause 11

Bridge bank

Question proposed, That the clause stand part of the Bill.

Mark Hoban: The clause deals with the bridge bank option, which is the least familiar to the Committee. We all know what temporary public ownership is, and we all know about the private sector. I want to speak about some of the tensions that there might be in running a bridge bank. We touched on them briefly when dealing with the code. The arrangements generated a reasonable amount of comment during the consultation process, but there is concern about how a bridge bank might operate in practice.
In response to the July consultation, the British Bankers Association said:
Under the bridge bank model the Bank of England would play a key role in setting strategic objectives and overseeing the management. Inevitably having the central bank involved in matters of commercial positioning, possibly with the bank also receiving public financial support, could raise competition policy issues.
The code suggests that the Bank would be run on a conservative basis.
The City of London Law Society, in its response, said:
We would...welcome further clarification regarding what a bridge bank would be able to do in terms of banking functions. Is it envisaged that it will be able to accept new deposits or to accept new business? There is a real risk that allowing it to carry out traditional banking activities could distort the inter-bank market.
Not LIBOR in that context, but competition between banks. The society noted that it could be arguedas we did earlier this year in the context of Northern Rockthat
because of the bridge banks healthy and attractive balance sheet and because it is in effect supported by the Authorities, there is the chance that it will have a competitive edge over other banks.
In terms of running a bank on a conservative basisI use the language of the codeto what extent will a bridge bank be able to carry out the normal activities of a bank? Will it be open to accepting new business? Will it be open to innovative competition with other banks?
One objective of the bridge bank is to try to facilitate a private sector purchase. It would clearly need to maintain the franchise value of the failing bank. Would that be maintained if the bank is run in a conservative fashion, or would it always be at the bottom end of the market? If so, that position could stifle it over time and limit its ability to grow. In the long term, it could reduce its franchise value, although that depends on how long it remains as a bridge bank. These issues would not necessarily be relevant if it was a bridge bank for only a month, but the rules for the reports that the bank would need to make allow for the possibility of the bridge bank lasting for more than a year. I would like a better understanding of the constraints under which a bridge bank would function.
Another aspect is who would run the bridge bank. The Bank of England is in charge of appointing a new board of directors, subject to the approval of the Financial Services Authority. The City of London Law Society said in its representation:
The directors may be selected by the Bank of England from amongst the existing directors of the failing bank... but there is clearly a question as to whether such directors would be willing to take on the corporate governance of the bridge bank...to whom would they owe their duty of carethe Authorities or the failing banks creditors?
The code says that the bridge banks board may or may not include employees of the bank, and that it will be decided case by case. However, according to the July consultation on the special resolution regime, the Bank of England is expected to weed out from the board of the failing bank the directors who contributed to its downfall. The example of Northern Rock may be instructive. The chief executive and the chairman resigned fairly quickly and new senior directors were appointed, but not all the executive members of the board of Northern Rock were replaced.
The third element to pick up on is how the bridge bank will be run at arms length from the Bank of England. Arms length is defined by the code as
leaving day to day management of the bridge bank to its board of directors and keeping shareholder involvement at a strategic level.
It later states that
the Bank shall work with the board of directors to decide upon how the bridge bank should be operated... where appropriate the board shall produce a business plan setting out how the directors intend to operate the bridge bank in a manner pursuant to meeting the objectives.
If the primary objective is to sell the bank on, how will that be reconciled with the challenge of the competitive issues? The arms length relationship the bank will have with the directors as the sole shareholder is the right place to start, but there is also the potential move towards deciding how the bridge bank should be operated and where the division is to be drawn between the arms length relationship and the operational decisions. The Minister will not be immune to some of his colleagues comments about the actions that Northern Rock should be taking in the context of repossessions. When the Government take a controlling stake in RBS and a large minority stake in Lloyds HBOS, pressure will be placed on them as a significant shareholder to become involved in the day-to-day operations of the bank. How will the arrangements for bridge banks work to prevent that day-to-day interference?

John Pugh: I have a different set of concerns. The clause starts:
The second stabilisation option is to transfer all or part of the business of the bank to a company.
I want to talk briefly about partial transfers. In our evidence sessions concerns were expressed about that remedy. Angela Knight was particularly vocal. Responding to a question from the hon. Member for Gosport, she said that
we would like to see an entire bank move... Partial transfers come rather a long way down the list. Our preference would be not to have a partial transfer unless there has been a default. If it is the decision of Parliament that a partial transfer must remain as part of the SRR tools before a default is triggered, it is absolutely essential that the creditors rights are not reordered, that the netting is properly taken care of and that the decisions taken at the time cannot be retrospectively changed by clause 65.[Official Report, Banking Public Bill Committee, 21 October 2008; c. 48, Q136.]
She was a particularly eloquent witness. She gave some reasons for her stance and her distaste for a partial transfer earlier in the proceedings in answer to a question from the hon. Member for Fareham. [Interruption.] I am sorry. My phone is ringing. It is not a call from the British Banking Association, although one would have been helpful.
Angela Knight told the Committee that
other peoples intervention regimes do not interfere with creditors rights, and netting agreements are preserved so that there is not the problem of not being able to net off your capital. Certainly, we have been told by a number of our members that if they could not net off, they would no longer be able to do that business here in the UK, so we would see a commensurate loss of a significant amount of business out of London.[Official Report, Banking Public Bill Committee, 21 October 2008; c. 38, Q109.]
The allegation is that there is a possibility on the horizon that fewer people will engage in banking activities in the City of London or in the UK.
I reiterate those concerns because they were legitimately brought up by the British Banking Association in a particularly eloquent and telling way. It may be that the concerns the association is voicing are well addressed by subsection 3, which provides for a code of practice that may allay the associations concerns about what might be regarded as an unfair or improper partial transfer. We can return to the debate about toxic and non-toxic assets and how we treat them differently, but the Minister has heard the concerns of the BBA. Has he had time to consider and respond to them? The concern is primarily about the first sentence of the clause; the association has a distaste for partial transfers because it thinks that as long as they are in the toolkit there will be detriment to City business, so I would like the Minister to respond to that concern.

Ian Pearson: I understand the concerns of the British Bankers Association on that matter, and my officials have had extensive discussions with its representatives. It is represented on the expert liaison group, whose views we have been listening to intently. It is fair to say that partial transfers are the most contentious part of the special resolution regime. We are keen to ensure that creditors are no worse off in the case of partial transfers, which is one of the reasons why we inserted clauses in the Bill that will enable us, through secondary legislation, to provide strong safeguards.
As I have explained, we are consulting on both the code and some of the legislation on safeguards for partial property transfers. If I may engage in a little publicity, the document Special resolution regime: safeguards for partial property transfers is available today at the very reasonable price of £14.35, but it is free to members of the Committee, who I am sure would like to take one from the brown box in the Committee Room. The document answers several of the points that the hon. Member for Southport raised because it specifically covers set off and netting arrangements, security interests, structured finance and third-party compensation. It includes consultation on the code, which the hon. Member for Fareham also talked about on several occasions. We are keen to see comments on the code from outside.

David Gauke: We will have a greater opportunity to debate those matters when we get to clause 43 and, to some extent, clause 42. Is the Minister saying that the safeguards will be included in the secondary legislation or in the code of practice? Presumably there will be a combination of the two, but can he give us some guidelines on what the balance will be?

Ian Pearson: The stakeholders we consulted this year have been very much of the view that they want the safeguards in secondary legislation, rather than in the code. We have taken that to heart, which is why we have produced the consultation document. It is right that those safeguards are enshrined in secondary legislation. When the hon. Member for Fareham has had an opportunity to look at what we are proposing, he might start to take a different view of the code than that expressed in his previous comments. Rather than putting the safeguards in the code, it is right that they should be enshrined in secondary legislation and that Parliament should have an opportunity to debate them. We have tried, as far as possible, to reflect the views of stakeholders in the secondary legislation.
The hon. Member for Fareham rightly said that it is easy to recognise what temporary public ownership or a private sector purchase are, but that a bridge bank is slightly different and might appear strange to people from outside looking at our deliberations, so I shall explain in a little more detail what the bridge bank option will do. In essence, the bridge bank option will give the Bank of England the opportunity to stabilise a bank, preserve franchise value and ensure that consumers have continued access to banking services. It will provide the Bank with time to pursue a private sector solution where that could not otherwise have been arranged immediately by allowing, for example, potential acquirers the necessary time to carry out essential due diligence on the business.
The bridge bank option is important, as it enhances the possibility that the authorities can facilitate the onward sale of the bank to a private sector purchaser, which, as I have said, is the Governments favoured option for bank resolution. I understand the views that Angela Knight from the British Bankers Association has expressed. In response to the hon. Member for Southport, the BBA and the Building Societies Association recognise the potential utility of the bridge bank as a tool, but they have concerns about the safeguard provisions and the situation of creditors, which we are trying to address.
Of course, it is important that bridge banks be managed in the right way. The hon. Member for Fareham raised issues about what we mean by management on a conservative basis. It is appropriate to set out how that will work in practice in greater detail and, to that end, the code of practice, which the Committee considered on clause 5 and which is available for consultation, makes illustrative provision.
It may be helpful to put on record the fact that the Bank of England will not profit from operating a bridge bank. The compensation provisions, which will be discussed in detail in due course, provide that a bank resolution fund must be established when a bridge bank is created. The fund provides the failing bank with a contingent economic interest in the resolution. The bank resolution fund is a scheme under which the failing bank becomes entitled to the proceeds from the sale of some or all of a bridge banks business, less any deductions necessary to reflect the use of public funds in the resolution, including the placing of public funds at contingent risk, or any other costs of the resolution. On the winding-up of the failing bank, the net proceeds of the resolution will flow to the creditors and, should creditor claims be satisfied in full, the shareholders of the failing bank.

Peter Viggers: I am listening carefully to the Minister. He said that the entitlement would be minus any amount reflecting the net cost. Is he referring to the Treasury and Bank of England costs of administering the bank? There must be management and administrative costs involved. I imagine that most costs would be ring-fenced within the bank, but there must be costs of administering the entity at the centre. How will the costing be done and how will the Government, through their various manifestations, charge for management?

Ian Pearson: My understanding of the legislation is that the Bank of England, which will be pursuing the stabilisation option, can retrieve its costs from the bridge bank. I am not aware that there are likely to be substantial Treasury costs involved, but if I have information about that, I will get back to the hon. Gentleman.
Let me take up the other points raised in the debate about the bridge bank being managed on a conservative basis. The bridge bank will carry out the banking business transferred to it, which is likely to be predominantly deposit taking. It could take on new business, but it is not at all intended that it compete aggressively in the marketplace. Our intention is to return a bridge bank to the private sector swiftly, if that is consistent with the special resolution objective and meanwhile operate the bridge bank conservatively.
I do not believe that the bridge bank would have an unfair advantage over private sector banks or that it would distort competition. It would be inappropriate for a bridge bank to compete unfairly on the back of public sector support and we do not intend that to happen. EU state aid rules and other relevant competition rules would prohibit it in any case.
In conclusion, I believe that having the provisions as a tool will be an important part of what we need to put in place for the future. It would not be sufficient to have only the ability to take a bank into temporary public ownership or to transfer it to a private sector purchaser. This is an essential tool but, as with all these tools, we hope it will not have to be used. Given the circumstances in respect of bridge banks and the issue of partial transfers, it is right that we consult widely with the industry about the potential ramifications and that we take due consideration of the views expressed to us in response, which the hon. Members for Southport and for Fareham have already mentioned. I am confident that as a result of that consultation we can produce secondary legislation that will give safeguards on partial property transfers. Our early discussions with the industry have been positive.

Question put and agreed to.

Clause 11 ordered to stand part of the Bill.

Clause 12

Temporary Public Ownership

Ian Pearson: I beg to move amendment No. 90, in clause 12, page 7, leave out line 4.

Eric Illsley: With this it will be convenient to discuss Government amendment No. 91.

Ian Pearson: These minor amendments are technical clarifications to the code of practice provisions in relation to banks and temporary public ownership. Amendment No. 90 removes the requirement for the code of practice to make provision about the content of share transfer orders. Every share transfer order will be different, as determined by the particular bank in question. As such, it is not appropriate for the code of practice to attempt to describe in detail the content of such orders.
Amendment No. 91 clarifies the code of practice provisions in relation to banks in temporary public ownership. As currently drafted, the code would have to make provision about the management of transferees. However, the code should not provide guidance on the management of the owner of the bank in temporary public ownership, that is the company fully owned by the Treasury or a nominee of the Treasury. Rather the code needs to make provision about the management of the bank itself.

Amendment agreed to.

Amendment made: No. 91, in clause 12, page 7, line 5, leave out transferees under share transfer orders and insert
banks taken into temporary public ownership under this section.[Ian Pearson.]

Clause 12, as amended, ordered to stand part of the Bill.

Clauses 13 to 15 ordered to stand part of the Bill.

Clause 16

effect

Peter Bone: I beg to move amendment No. 113, in clause 16, page 8, line 10, at end insert
(3A) Subsection (3) has effect notwithstanding any provision in European Union law..

Eric Illsley: With this it will be convenient to discuss amendment No. 114, in clause 31, page 14, line 7, at end insert
(3A) Subsection (3) has effect notwithstanding any provision in European Union law..

Peter Bone: I tabled these two amendments to help the Government. I hope that when I have explained them they will be accepted, or at least the Government will think about them and come back on Report.
We are talking about a Bill and provisions that we hope never to see in force. If we had been talking five years ago about banks collapsing and the need to make provisions for them, people would have laughedit just does not happen. It happened a hundred years ago. So, it may be that all our deliberations are for nothing. The Act may never come into force. The Minister has said on many occasions that it will only be called on in exceptional circumstances. I agree with that, but he has also gone on to say on a number of occasions that we want clarity and speed. If there is a failing financial system, speed is needed to deal with the outcome. The Bill seeks to ensure that the effect of transferring sharesor of transferring property, which my other amendment refers tocan happen straight away, without interference. It is clear that that is the intention of clauses 16 and 31. The transfers will have effect whatever any legislation says, so any contract law or other legislation will be ripped up to allow for these special, unusual provisionstemporary ownership of a bank, for example.
The problem is that the Single European Act overrides, or at least the Government believe that it overrides, existing UK legislation. We could find ourselves in the kind of situation that I think has already come about in the current financial debacle, in relation to Northern Rock. The Northern Rock provisions were delayed because the Government had to get clearance from the EU that there was not a problem with state aid. That clearance was negotiated and achieved, but it took time. If the special provisions in the Bill ever needed to be used, speed would be required. The whole Bill is designed for speed. There can be partial ownership, a sale to a private sector purchaser or nationalisation. What we cannot have is the European Union saying, Hang on a minute; you cant do that. You are in breach of EU law. Worse still would be the EU not making that decision and not saying anything, leaving us in limbo. It would say, You might be in breach of EU law, so you cant do it, and meanwhile the whole of our financial system would collapse. That cannot be allowed. The Government will possibly put two fingers up to the EU and do it anyway, but we do not want to be in that situation. The Government have made it clear that their intention, despite what the EU says, is that this will happen. That is what I assume; if the Minister says that that is not the case, we have a serious problem.
The Minister might be minded to say to me, You cant do this. You cant add that amendment because it is not legal. I am afraid that I am not a lawyer, and I apologise for any mistakes that I might make in the pronunciation of some of the cases that I will mention. The Minister might refer to the Factortame case, which relates to the Merchant Shipping Act 1988. The European Court of Justicethe Luxembourg-based judges who extend our law, almost behind our backsruled that that Act was illegal. The matter went to the House of Lords, where it was decided that the European Union Act is incorporated into British parliamentary law. That makes it difficult for us to overcome the problem that I have been talking about. We cannot be sure that the transfers of property or shares could occur without EU approval, and in the turmoil we might not get that approval, or it might be delayed. If that was the case, there would be no point in making the proposal. However, no one Parliament can bind a following Parliament. It does not have the power to do that, even if it wanted to, despite what some Ministers think. We are a sovereign nation. It will be helpful to the Committee to know that that is not my personal opinion, and that it is therefore not necessarily correct.
The Thoburn v. Sunderland city council case was on this very matter. With your permission, Mr. Illsley, I shall read a short paragraph from the conclusion. Lord Justice Laws stated:
Whatever may be the position elsewhere, the law of England disallows any such assumption. Parliament cannot bind its successors by stipulating against repeal, wholly or partly, of the 1972 Act. It cannot stipulate as to the manner and form of any subsequent legislation. It cannot stipulate against implied repeal any more than it can stipulate against express repeal. Thus there is nothing in the 1972 Act which allows the Court of Justice, or any other institutions of the EU, to touch or qualify the conditions of Parliaments legislative supremacy in the United Kingdom. Not because the legislature chose not to allow it; because by our law it could not allow it. That being so, the legislative and judicial institutions of the EU cannot intrude upon those conditions.
It is quite clear from that judgment that any Government could put a little line in, as my amendment does, to take the EU law out of a specific Act. That can be implied or real. In here it will be real because we are saying it. Is it the Governments view that the Bill as it stands would allow all these special provisions to occur without any regard to EU law? If that is the case, I will be content, but I still think it would be useful to have my amendment. If it adds nothing, it does not damage the Bill. However, it may help to clarify the position so that the law is as I think the Government want it to be. Therefore in this extreme emergency, which we hope will never occur, there will be clarity that what the British Government and this Parliament decide is the law and cannot be overturned by a small group of judges in Luxembourg who say, By the way, you cannot have temporary ownership of the bank. You cannot sell it on privately despite the fact that you have torn up all your own laws of contract or your competition laws.
I do not want the Minister to tell us that we are the heart of Europe and that that will never occur. We are talking about extreme circumstances. I need to know, before deciding whether to press the amendment to a vote, whether the Government intend our law to be supreme or whether they accept that the EU will look at our decisions and then decide whether we can proceed. If that happens there will be delay and there would not be clarity. I am grateful to the Committee for listening to that point and I shall be interested to hear what the Minister has to say in response.

Ian Pearson: Clauses 16 and 31 set out the effect of a transfer of the securities or the property, rights and liabilities of a failing bank by an instrument or order made under this part of the Bill. In particular, the clauses specify that a transfer may take effect in law by virtue of the instrument or order. Subsection (3) of each clause specifies that a transfer is to take effect despite any restriction arising by virtue of contract or legislation or in any other way. The purpose of these provisions is to ensure that a transfer of securities is effective in law and takes place in spite of any restrictions that might otherwise exist.
Amendments Nos. 113 and 114 insert a new subsection (3A) into clauses 16 and 31. They specify that a transfer may take effect despite any restriction arising by way of a provision in European Union law. As honourable Members will be aware, Member States must not legislate in a manner contrary to Community law. We do not believe that we are legislating in such a manner with the production of the Banking Bill.
As Members will know, we always declare at the start of our Bills that they comply with the Human Rights Act 1998 and that they are compatible with convention rights. We do not say that they are compatible with EU law because we would not produce a Bill if it were not compatible with EU law. I am happy to inform the hon. Member for Wellingborough that there is nothing in this legislation that is incompatible with Community law. Indeed, the Government strongly support the general principles of the EU state aid framework and we work closely with the European Commission and Parliament on state aid related matters.
What the hon. Gentleman seeks to do through these amendments, however, is in our view clearly illegal. The provisions of the amendments would place the UK in breach of our obligations under the EC treaty, would damage our reputation in the EU and, if not corrected, would lead to legal proceedings against the UK. We cannot accept what are in effect law-breaking amendments. Nothing proposed in this legislation should give the hon. Gentleman any concern that there would be unnecessary delay in exercising the powers of the special resolution regime.

David Gauke: Where clause 16 refers to a transfer taking effect
despite any restriction arising by virtue of...legislation,
is the Minister saying that that is arising as a consequence of any UK legislation and that that carve-out does not apply to EU legislation?

Ian Pearson: In essence, that is what I am saying. We operate within a framework of Community law. It is not appropriate to go into the detail. I appreciate that the hon. Gentleman does not want anything to get in the way of speedy resolution when the situation of a failing bank arises. The Bill as it stands will allow speedy resolution to take place and clauses 16 and 31 are appropriate as they stand.

Peter Bone: I am partially reassured by what the Minister has said. I am pleased that the Government are not bringing forward a Bill that goes against EU law but, of course, the Government never think they are bringing forward a Bill against EU law until the justices in Luxembourg decide that they have.
My problem is that the envisaged situation will be a national emergency. It will be a crisis of enormous significance, such as we saw recently when the Government did act before getting approval from the EU and the EU had to catch up afterwards. In reality, the Government ignored the EU and persuaded it afterwards of the need to approve. I see no harm in inserting my words because they do not change the matter. If the Minister is right and the Bill complies with EU law there is no problem.
I have one question that I am not sure about. The Minister says that this legislation will not cause delays but we have seen a delay with the share placements and the preference share subscription documents relating to the £42 billion of investment by the Government into private banks. The delay has come about because in those documents, which I have read in detail, the preference share investments cannot be repaid for a minimum of five years and no dividends can be paid. Those sections of the agreements are very strange and do not make any commercial sense. They were inserted because of European Union law. Those investments have been delayed and have not taken place, despite the Government saying that they have, because commercially banks need to pay dividends to make them a marketable security. There are renegotiations at the moment, which are being widely reported in the Financial Times. Whichever way we look at it, there is clearly a delay. The situation is not of the scale that we might envisage in which the whole of the financial system was collapsing.
I am reassured by the Minister in one respect and concerned in another, but I think that I have made a mistake. I have looked at the drafting againit is not well draftedand it misses out the important factor that the judges must interpret it in such a way, which I should have said. I do not think that it would be right for me to press an amendment that is incorrectly drafted. The principle is still of great importance and I would like to come back to it at a later stage. I beg to ask leave to withdraw the amendment.

Eric Illsley: For the benefit of the Committee, the Clerk and I are of the opinion that it is perfectly well drafted, which is why it was accepted for debate.

Amendment, by leave, withdrawn.
Clause 16 ordered to stand part of the Bill.

Clause 17

Continuity

Question proposed, That the clause stand part of the Bill.

Mark Hoban: I want to check with the Minister what the clause means, as it is not entirely clear from the explanatory notes where we are heading with it. I think that the objective is to ensure continuity of service, so that if the failing bank has a range of contracts with IT suppliers and the other bodies that a bank needs to function, those contracts will transfer to the bridge bank or to the new private sector provider. I want to ensure that that is the case.
Where does the provision sit with the fairly standard contract provision that allows a supplier or provider to withdraw from an agreement if there is a change of control? There clearly will be a change of control if a bank is moved from one set of shareholders to, say, a new private sector purchaser or to the Bank of England through a bridge bank. Ordinarily, the supplier would be able to withdraw from the contract if it was unhappy with the new owner. It is unlikely that a supplier would be unhappy with the Bank of England, but it may be unhappy, due to its history, with a new private sector owner. I want to know whether clause 17 overrides change of control provisions.
Heritable Bank, which is in administration, is unable to collect the direct debits used to meet mortgage payments because its agent has yet to reach a satisfactory agreement with the administrator. That arrangement falls outside the scope of the Bill, but what arrangements are there to ensure that the right legal steps will be in place in a future failed bank situation so that there is continuity of service? I think that we all agree that it is better to have continuity of service in, for example, the way that people operate their bank accounts, than to have to use the Financial Services Compensation Scheme. Is the clause about ensuring continuity of service? How will change of control provisions be dealt with, and what powers are available to ensure that third parties provide continuity of service when they do not want to or find some challenge in doing so?

Ian Pearson: The clause sets out that a share transfer instrument or order may provide for a transferee to be treated as the same person as the transferor. In the context of a shared transfer, that means that either a private sector purchaser or the Treasury may be treated as a shareholder of the failing bank. That is necessary to preserve the continuity of a failing banks arrangements at change of control and is essential to ensure that the bank can continue to operate after the transfer.
In particular, the clause provides that agreements entered into by a failing bank may be treated as made by, or done in relation to, the transferee. It also provides that an instrument or order may specify that anything that relates to anything transferred and is in the process of being done by the failing bank before the transfer date can be continued by or in relation to the transferee.
As the hon. Member for Fareham suggests, that is all about ensuring continuity in a transfer situation. For example, such a continuity provision removes the requirement that on or before the transfer the failing banks name be substituted in commercial documentation by that of the transferee. Provision may also be made in a transfer instrument or order to require or permit a transferor or transferee to provide each other with information and assistance. The transferee may require information about the IT services used by the transferor in order to maintain continuity of banking services to depositors.
The clause therefore makes some essential provisions to ensure that the failing bank can continue to operate following the transfer. The provision is necessary to ensure that the transfer of securities is fully effective. A transferor may hold information that is important for the conduct of the resolution, so in some situations it is appropriate that the authorities should be able to require the transferor to supply that information. It is not a one-way requirement. The clause also provides that a shared transfer instrument or order may provide for a transferee to supply the transferor with information and assistance that might be necessary.
The provisions would not be used to arrange for new agreements, such as for services and facilities to be provided to a transferee. The continuity obligation powers in clauses 57 to 60 provide the powers in that regard, and we will obviously discuss them in due course. I hope that brief explanation provides the hon. Member for Fareham with some assurance.

Question put and agreed to.

Clause 17 ordered to stand part of the Bill.

Clause 18 ordered to stand part of the Bill.

Clause 19

Directors

Question proposed, That the clause stand part of the Bill.

Mark Hoban: I want to understand what clause 19 allows the Bank to do, because it sounds interesting. A share transfer instrument may enable the Bank and a share transfer order may enable the Treasury
to remove a director of a specified bank,
which presumably means to sack him, and
to vary the service contract of a director of a specified bank,
which I assume means to pay him less and remove his entitlement to bonusesa topic that has had a little airing over the last few months.
The instrument may also enable the Bank or Treasury
to terminate the service contract of a director of a specified bank
and
appoint a director of a specified bank.
The clause gives the Bank and the Treasury significant powers to vary the board of directors and would enable them to remove the lump sum failure bonus that directors sometimes receive when their contract is terminated. There has been much criticism of that sort of practice. Does the clause enable the Treasury to stop such big pay-offs?

Mark Todd: I was drawn by the particularly sweeping nature of the clause, but I then assumed that it is governed by normal contract law in other senses. It must therefore be part of both a negotiation with the individual involved and also subject to the normal commitment to honour a contract that has been entered into freely between two parties.

Mark Hoban: I would guess so, too, but we are in uncharted waters with the Bill. All sorts of new powers have accrued to the Treasury and the Bank to enable them to vary other types of contractual arrangements, which makes me wonder just how far they will go.

David Gauke: A few moments ago we were debating clause 16. Admittedly it relates to effecting the transfer, but it states that it takes effect
despite any restriction...by virtue of contract.
I do not think that will extend to the provisions in this clause, but there is provision in the Bill for normal contract law not to apply in some circumstances. The Minister might be able to tell us whether it could apply to the clause.

Mark Hoban: Indeed. My hon. Friend demonstrates the value of having a legal background. My purpose is to probe the extent to which these powers can be exercised. Those who are ardent critics of the bonus culture in the banking system and who would not want to see directors being given lump sums to be paid offI have heard such expressions of concern from the Back Benches in various debates over the last monthwould fall upon the clause with great glee assuming it has achieved some of their goals. I fear that the Minister might disappoint them.

Mark Todd: It does not permit capital punishment of directors.

Mark Hoban: Indeed it does not, but there is still Report.
Will the Minister clarify the scope of the clause? To what extent does it enable the Bank or the Treasury to override some of the contractual terms that a number of people find so objectionable?

Peter Viggers: As my hon. Friend has pointed out, subsection (1) gives four powers to the Bank of England and subsection (2) gives four similar powers to the Treasury. Subsection (3) states:
Appointments under subsection (1)(d) are to be on terms and conditions agreed with the Bank of England.
Subsection (4) states:
Appointments under subsection (2)(d) are to be on terms and conditions agreed with the Treasury.
That leads to some rather strange drafting:
A share transfer instrument may enable the Bank of England... to appoint a director... on terms and conditions agreed with the Bank of England.
Either the clause is superfluous, because one would assume that an appointment is to be made on terms that are agreed with the Bank of England and it should thus be struck out, or it is necessary to state that the appointments are to be
on terms and conditions agreed with the Bank of England.
As that applies only to paragraph (d), it follows, as night follows day, that it does not apply to paragraphs (a), (b) and (c). Which is it?
It is a most peculiar piece of drafting, because as the hon. Member for South Derbyshire pointed out, it seems to follow that the normal rules of contract would apply. If appointments are to be made by the Bank of England or the Treasury, they will make them on terms that they agree with the relevant parties. I would like to know whether subsections (3) and (4) are superfluous and why they do not apply to paragraphs (a), (b) and (c).

Peter Bone: I direct the Committees attention to subsections (1)(b) and (2)(b),
to vary the service contract of a director of a specified bank.
If that is, as my hon. Friend the Member for Fareham suggests, the ability to chop peoples bonuses or ensure that they do not get huge redundancy payments, it will be welcomed by the general public. Do the Government not have a problem with that, however, in that it would immediately offend European law? The front page of the Bill states that the Bill complies with the Human Rights Act, but those provisions would not comply with the human rights of the person who was having their salary chopped and their terms and conditions messed about with. The Minister said earlier that everything in the Bill complies with European Union law, so perhaps my hon. Friends interpretation is not what the Government intend.

Ian Pearson: The clause provides that a share transfer instrument or order may enable the Bank of England or the Treasury to appoint or remove directors. It also provides that the instrument or order may confer on the Bank or the Treasury the powers to vary or terminate the service contracts of directors. It is absolutely right that it should do so. People would not expect the Government to do anything less with regard to a failing bank. The powers are wide-ranging, and it is right that they are in the Bill.
The provision gives the authorities the necessary powers to put appropriate management in place, once control of the failing bank has been transferred. It is critical that the deposit taker has a board of directors with the appropriate expertise to manage the business. However, members of the board may have resigned immediately before the transfer, or the board may not have the necessary expertise or may no longer be appropriate to manage the bank. It is, therefore, vital, in the interests of the resolution, that the authorities can remove and appoint directors.
We consider it appropriate for the authorities to be enabled to make specific provision in an instrument or order in respect of the directors of the board, because the procedures for the appointment and removal of a director set out in the banks articles of association and in company law may be time-consuming. Further, it is likely that the right of appointment or removal of a director may be conferred only on members of the company, which would mean that the Bank of England would be unable to make an appointment in the case of a transfer to a private sector purchaser. Therefore, provision is made to ensure that appropriate directors can be put in place expediently, in all circumstances where the authorities consider that necessary.
On Second Reading, the hon. Member for Dundee, East asked the Government to consider whether it was appropriate for the Treasuryas well as the Bank of Englandto have those powers. I want to respond to him now, although he is not in the room. I believe that it is appropriate, because the Treasury may take a bank into temporary public ownership as a last resort. If that occurs, it is right that the Treasury should have the power to put in place the appropriate management.
I will try to be more specific on restricting payments. My hon. Friend the Member for South Derbyshire raised this point. The terms under which former directors were employed are a matter for the previous board, and would be governed under normal contract law. The Bill provides that the authorities may make provision in a share transfer instrument or order to remove and appoint directors and to alter or terminate the service contracts of directors, but normal contract law would still apply. The authorities would want to put in place appropriate remuneration arrangements for new directors. All such management decisions would be made case by case, but it is likely that some of the existing directors have already resigned, or it might be felt that they should be required to do so.
It is also likely that some existing members of management will still be required, especially those with a high level of operational expertise for the purposes of business and managerial continuity. In those circumstances it is right that service contract variations should be in place that could include variation of salary terms, bonus payments, tenure and other matters. That might involve a period of negotiation and would again be governed by employment and contract law. Again I want to make it clear that the provisions we are debating are restricted to the specific bank that is in the SRR. These are not general powers. I hope that with those clarifications we can agree on clause 19.

Question put and agreed to.

Clause 19 ordered to stand part of the Bill.

Clause 20 ordered to stand part of the Bill.

Clause 21

Termination Rights, &c.

Question proposed, That the clause stand part of the Bill.

Mark Hoban: I am sure the Minister has copious notes to explain the meaning of this clause. Having read the clause and the explanatory notes, I am none the wiser as to what it means. I would be grateful if the Minister explained it to the Committee.

Ian Pearson: I must apologise to the hon. Member for Gosport for not replying to the points he made about subsections (3) and (4) in clause 19 when he suggested that they were superfluous. With your indulgence, Mr. Illsley, I would like briefly to explain that they make it clear that the Bank or the Treasury can specify the terms and conditions of appointments. Otherwise this provision would be left to the board of directors to determine. We do not need to make the same provisions for paragraphs (a) to (c), which is why the clause is drafted as it is. I apologise for not replying to the hon. Gentleman in the right place.
In answer to the question by the hon. Member for Fareham about clause 21, I am more than happy to explain. The clause sets out certain provisions in relation to events of default. An event of default clause in a contract gives a specified right to a counterparty if a specified event occurs. For example, a contract could stipulate that a counterparty should have the right to terminate the contract if the banks credit rating changes or if there is a change of control of the bank. This clause is important since most modern contracts make heavy use of these provisions.
The transfer of securities is likely to be characterised as an event of default which would give counterparties the right to terminate or modify contractual arrangements in the event that the authorities exercise the transfer powers. Clearly, any termination of key contracts would significantly reduce the likelihood of the deposit taker being able to continue as a going concern. It could necessitate having to renegotiate contracts, potentially with new counterparties, with no guarantee that similar terms could be arranged. In extreme circumstances, for example, if the majority of the banks counterparties sought to rely on termination rights, the bank would be unable to continue its operations. In addition, the act of counterparties terminating their contractual arrangements with the deposit taker is likely to send a strong signal to the market that other counterparties should not do business with the bank. Thus, a number of counterparties closing out contracts could lead to a wider counterparty flight from the deposit taker, which would have severe consequences for the success of the resolution. Therefore, this clause allows the authorities to make provision for a shared transfer instrument or order to be disregarded in determining whether a default event provision applies; in other words, that such default event rights may be disapplied in relation to a transfer of control by way of a shared transfer order or instrument.
The powers are designed to be tailored to particular circumstances and thus, where practicable, an event of default might be modified rather than entirely disapplied. The provisions, however, could not be used to override financial collateral agreements, which are protected by the financial collateral arrangements directive and which in broad terms must be allowed to take effect in accordance with their terms.
This is an area where, in the light of further analysis and consultation, the Government have adopted a more restricted form of the powers than those taken in the Banking (Special Provisions) Act 2008, which, for example, apply to any person having a specified connection with a deposit taker or any of its group undertakings. That is an essential and proportionate provision for ensuring that a deposit taker can continue to operate, notwithstanding any change of control as a result of the powers under this part of the Bill.

Question put and agreed to.

Clause 21 ordered to stand part of the Bill.

Clauses 22, 23 and 24 ordered to stand part of the Bill.

Clause 25

Supplemental instruments

Ian Pearson: I beg to move amendment No. 92, in clause 25, page 11, line 23, at end insert 
(a) provides for the transfer of securities which were issued by the bank before the original instrument and have not been transferred by the original instrument or another supplemental share transfer instrument;
(b) .

Eric Illsley: With this it will be convenient to discuss the following: Government amendments Nos. 93 to 95.
Government new clause 10Reverse share transfer.
Government new clause 11Bridge bank: reverse share transfer.

Ian Pearson: The group of amendments and new clauses provides for additional flexibility to be introduced to the share transfer powers relating to supplemental transfers, which are already provided for in the Bill, and also reverses transfers, which are the subject of the new clauses in the group. A similar group of amendments have been tabled in relation to the property transfer powers. Those will be debated when we reach clause 39.
While it is envisaged that the vast majority of any supplemental and reverse transfers will be made in relation to property, the amendments replicate those provisions for the share transfer powers. However, they are not, of course, being introduced simply for the purpose of consistency; there may be circumstances in which that added flexibility is needed. It may help the Committee if I provide a brief introduction to the concept of supplemental share and reverse share transfers.
Recent events have clearly demonstrated that resolution interventions may need to occur with extremely short notice. In such situations, the due diligence undertaken may only be preliminary. Further work may reveal additional details about the nature of securities or, indeed, the business that has been transferred. Supplemental transfers provide for further transfers of securities from the holders of securities to the relevant transferee. Reverse transfers provide for securities to be moved back from a transferee to the original holders of the securities. To take control of the bank, securities that confer control rights will need to be transferred. Such securities may not be limited simply to ordinary voting shares, but may include securities such as preference shares and hybrid equity-debt securities, which may confer control rights in certain contingencies. In circumstances where an extremely swift transfer of ownership of a bank is required to protect financial stability, it might not be possible to have an exhaustive list of all the securities of the bank at the time of transfer. Moreover, in general it is difficult to foresee exact circumstances that may come to pass, so there is a need for flexibility. That particularly applies given the complexity of institutions to which the powers are intended to apply.
Many banks have extremely complex capital structures, involving a broad range of different classes of security, including forms of security bespoke to the bank in question. It is worth noting that the powers may not necessarily always be used to effect an actual transfer of securities. Instead, they may be used to make provision in connection with a transfer that has already been made. For example, a supplemental order may provide simply for the conversion of securities, as permitted by clause 18, or make incidental and consequential provision, as permitted by clause 22. I accept that it would be desirable for such supplemental and reverse transfers not to be required. However, for the reasons that I have given, it is prudent to include the provision to ensure that the stabilisation powers are suitable for dealing with the broadest range of circumstances.
I shall now turn to the specific provisions of the amendments. Amendment No. 92 permits supplemental share transfer instruments to effect a further transfer of securities to a commercial purchaser. An example of the circumstances in which that may be necessary is where further due diligence reveals that a person has a class of security other than ordinary shares which nevertheless confers on that person some form of right actually or contingently to control the failing bank. Therefore it may be necessary to transfer that class of security in order for the Bank of England to secure the full control of the deposit taker for a commercial purchaser.
New clause 10 provides that the Treasury may make reverse share transfer orders. A reverse share transfer order may be made in two circumstances: first, following the transfer of a failing bank to temporary public ownership in accordance with clause 12; and secondly, following an onward share transfer to a publicly-owned transfereea company wholly owned by the Bank of Englandthe Treasury or a nominee of the Treasury. As with all other forms of transfer, the Treasury must consult with the Bank of England and the FSA before making the order.
New clause 11 makes similar provision in relation to the Bank of England and bridge banks. The clause provides that the Bank of England may make bridge bank reverse share transfer instruments. Such instruments may be made following the transfer of a bridge banks securities to a publicly owned transferee.
Amendments Nos. 93, 94 and 95 make technical clarifications. Amendments Nos. 93 and 94 make it clear that a supplemental share transfer instrument may transfer any securities of a failing bank that have not previously been transferred from their original holders. Amendment No. 95 makes it clear that an onward share transfer from temporary public ownership may transfer all the securities of the bank that have been transferred by share transfer orders or issued after the original transfer. This provides the Treasury with the flexibility to change the banks capital structure before it is sold, for example, by simplifying the nature of its securities.
Finally, I would like to make two general points about the provisions of the supplemental and reverse transfer clauses. First, members of the Committee will note that the general and specific conditions of SRR intervention do not apply to supplemental and reverse transfer instruments and orders. It would not be appropriate for further transfers to be subject to these conditions, as the initial transfer may have stabilised the bank such that it no longer is, for example, failing to meet its threshold conditions. Instead, these powers are needed to give full and proper effect to a resolution where these conditions have already been satisfied at the stage of the first transfer. Of course, where these further transfers interfere with property rights, the authority concerned must still be satisfied that the action is proportionate to the public interest aim pursued.
Secondly, a general restriction has been placed on the powers to make reverse transfers of securities. That is that such transfers should not be possible following a transfer of securities to a private sector purchaser. That restriction is achieved through exclusionthat is to say, no provision has been made that would confer a power to effect such a transfer.
The Government do not consider it appropriate for the authorities to have this flexibility. The securities will have been acquired by the private sector purchaser as part of a commercial deal. The existence of statutory powers to reverse the transfer which formed part of that deal, without reference to the private sector purchaser, is likely to introduce an element of risk which a purchaser may not be content to take. That could reduce the likelihood of agreeing the transaction. Therefore, in the interests of enhancing the chances of a private sector solution, the Government are not including that power in the provisions.
Recent experience of resolving failing banks has clearly demonstrated the need for flexibility. It has also shown that transfers may occur extremely swiftly, with only limited time available for detailed analysis of the banking business being transferred. For these reasons the Government consider it necessary to amend the provisions of the Bill. Of course, I accept that it would have been desirable to include these provisions initially; but that was not possible. It would have been wrong to rush through these changes before introduction of the Bill without a full analysis. Such an analysis has now been undertaken, and we have concluded that these powers are necessary.

Amendment agreed to.

Clause 25, as amended, ordered to stand part of the Bill.

Clause 26

Supplemental orders

Amendments made: No. 93, in clause 26, page 12, line 2, leave out paragraph (a) and insert
(a) provides for the transfer of securities which were issued by the bank before the original order and have not been transferred by the original order or another supplemental share transfer order;.
No. 94, in clause 26, page 12, line 18, leave out 10(2) and insert 12(2).[Ian Pearson.]

Clause 26, as amended, ordered to stand part of the Bill.

Clause 27

Onward transfer

Amendment made: No. 95, in clause 27, page 12, line 25, leave out paragraph (a) and insert
(a) provides for the transfer of
(i) securities which were issued by the bank before the original order and have been transferred by the original order or a supplemental share transfer order, or
(ii) securities which were issued by the bank after the original order;.[Ian Pearson.]

Clause 27, as amended, ordered to stand part of the Bill.

Clauses 28 and 29 ordered to stand part of the Bill.
Further consideration adjourned.[Mr. Blizzard.]

Adjourned accordingly at twenty-six minutes past Two oclock till Tuesday 11 November at half-past Ten oclock.